Knowing your place in the food chain

Something we allude to regularly
on this site is the importance of objectivity in
gambling. In terms of sharemarket investing, one of
the most important areas of objectivity lies in knowing
your own limitations.

It can be helpful to see the sharemarket in terms of
an ocean.

At the top of the food chain are the
Whales, massive investors who can move the
market singlehandedly. These comprise multi-millionaire
or billionaire individuals who sometimes become corporate
raiders, the Kerry Packers, Sir Ron Brierleys, Robert
Champion de Crespignys, Joseph Gutnicks and so forth.
It also includes the giant funds such as AMP that
invest billions of dollars worth of superannuation
and other money. Whales are not always fast, because
of their size, and often leave a trail, but you cannot
fight against them. If AMP is selling, the price is
probably not heading north. If Packer is selling,
you will probably not even know why your shares are
falling until it is all over.

At the next level are Sharks.
These are millionaire investors usually very close
to the action, often with inside information. In many
cases they are company directors or their associates
and they effectively control the prices of many lesser
stocks. Whales cannot invest in any but the very large
stocks, as the liquidity of second line stocks is
insufficient for the kind of stakes that are worthwhile
for a Whale. A Kerry Packer is not interested in investing
a mere million or two, no matter how attractive the
percentage return, it's a couple of nights blackjack
or a weekend at the races for big Kerry, and larger
sums would distort the market in many stocks and drive
the price up so high as to make the move counter productive.
Sharks can move in however and make a nice meal of
the smaller fish.

Attached to the Sharks are the equivalent
of the Remora Sucker Fish, smaller investors who know
a Shark and use their knowledge to advantage.

Experienced investors of lower net worth
are like various types of fish. Some can be
quite large like Barracuda, whilst others are more
like Whiting, flitting here and there in search of
a small, quick, profit.

Finally there are the inexperienced investors
and mug punters. They would be ideally characterised
as wood-ducks, quacking loudly about their latest
'tip', except that wood-ducks do not inhabit the ocean.
For the purpose of our analogy let us call them Plankton.

Plankton usually don't care about market
capitalisation, or indeed any 'fundamental' information
about a stock, and trade with various theories about
why they are going to win. Some might believe everyone
wins in the sharemarket, others just let their broker,
a Shark, make all the decisions for them, others are
there because they like the product of a particular
company and think that this somehow means the stock
is necessarily good value at the price they paid.
Many of them are highly intelligent or successful
people, but know nothing about the potentially dangerous
ocean that they have dipped their toes in.